Tough times ahead for construction sector as economy shifts out of mining boom

The past 10 years have been boom times for Australia’s construction sector.

Since 2000, the sector has grown at an average rate of 7.2% a year, according to BIS Shrapnel, as the mining boom fuelled demand. Today, the sector does 2.3 times as much work as it did in 2001.

But that period is ending, says Frank Gelber, the chief economist at BIS Shrapnel.

The forecaster, which publishes an annual Building in Australia report, expects construction to shrink 8% over the next four years as the mining boom draws to an end.

“We’re not going to be building as many mines, so the largest fall is in those regions where we’re seeing a cutback on mining investment,” he tells SmartCompany. But given the prevalence of fly-in, fly-out arrangements used to service these regions, this will impact the industry nationally.

It’s not the only factor that’ll negatively impact construction work in the next few years. The industry is facing a trifecta of difficulties.

As well as a slowing demand for new mines, the industry is also hurt by the continued difficulties in the residential construction market. Housing construction has picked up recently, but only in cities with a shortage of housing like Perth, Darwin and Sydney.

Another factor likely to hurt construction is the decline in government infrastructure spending. During the financial crisis, the government embarked on a building program that saw large construction demand for things like schools and hospitals. With the exception of the national broadband network, that is also drawing to an end, as the federal government tries to get its budget back into surplus.

“Construction is quite a bit more volatile than the other sectors of the economy, and we’ve been through a decade of really strong growth,” Gelber says. “That’s made a positive contribution to the Australian economy, both directly and indirectly.”

The slowdown in the construction sector is likely to also impact unemployment, Gelber says, as many large construction projects employ more people during construction than they do when fully operational.

The likely outcome all of this is a continued softening of the economy. “We’re not going to have a recession, just an ongoing softness,” Gelber says.

The beneficiaries of the shift will be those in cities like Sydney or Melbourne, as the economy tilts away from mining and back into services.

But this won’t be painless, Gelber warns.

“Transitions are never smooth. There’ll be lots of pain, experienced by those transitioning. It’s all very nice to talk about structural change, but it’s not nice if you’re the one doing the structural change.

“The mining boom was very painful on the way in. And it’ll be painful on the way out.”